Is the Next Silicon Valley Taking Root in Bangalore?

BANGALORE, India, March 19 — Twenty young engineers,
mostly from the Indian Institute of Technology, India's premier
technology school, peer into computer monitors in the no-frills office
of Read-Ink Technologies, a start-up company housed in a small building
in the bustling Indiranagar neighborhood of this city.

Bangalore's flourishing outsourcing companies, including Infosys Technologies and Wipro,
have attracted worldwide attention with their global clients and tens
of thousands of workers. Less known are the many technology start-ups,
like Read-Ink, that have taken root here in recent years.

The new
firms are drawn by the region's big pool of engineering graduates, many
of whom have expertise in esoteric new technologies. That advantage,
coupled with labor costs much lower than those of Silicon Valley, is
starting to turn Bangalore, long a center for lower-end outsourcing
services, into a center of higher-end innovation.

Some of these
firms are self-financed, others have capital from the West. Some are
run by foreigners. Others are founded by Indians, including returnees
from overseas.

Read-Ink, one of the self-financed operations,
is developing an advanced handwriting recognition software that can
read scanned forms, claim forms, medical records and even digital
tablets.

Its founders, Thomas O. Binford, a retired computer
science professor from Stanford University, and his wife, Ione, a
former manager at Hewlett-Packard, arrived here four years ago with five suitcases. They say they are now close to signing up their first business customer.

The signs of this shift toward high-value work are becoming more visible. Executives at Silicon Valley Bank,
which is based in Santa Clara, Calif., and provides consulting services
to technology and venture capital firms, said they were seeing twice as
many Indian start-ups looking for capital investment than even a few
months ago.

When
the members of the Bangalore chapter of the Indus Entrepreneurs, a
nonprofit network for entrepreneurs, collaborated with the venture
capital firm Draper Fisher Jurvetson Gotham to sponsor a business plan
competition last month, they were stunned to draw 125 entries vying for
the $150,000 top prize.

At the same time, Bangalore is becoming
a hunting ground for venture capitalists looking for promising
investment opportunities, such as Promod Haque, managing partner at the
venture capital firm Norwest Venture Partners in Palo Alto, Calif.

About
40 percent of Norwest Venture's portfolio companies, or about 20
companies, have development operations in India, mainly in Bangalore.
"More and more people are figuring out that Bangalore is a critical
step in making start-ups capital-efficient," Mr. Haque said, explaining
that cost savings here can help stretch initial investment funds.

Mr.
Haque is taking a hybrid approach to investment. He pairs entrepreneurs
of Indian origin who have returned to India (many have spent time
working in Silicon Valley and elsewhere) with Western executives who
have marketing and management expertise.

One of his investments
is Open-Silicon, a two-year-old silicon engineering company. Its chief
executive is based here, but its headquarters and marketing chief are
based in Sunnyvale, Calif. "Like Open-Silicon, which has most of its
customers within a five-mile radius of its headquarters, many
technology start-ups are servicing American and European markets," Mr.
Haque said.

Indrion Technologies, another new Bangalore
start-up, has six engineers working on embedded semiconductor solutions
for sensor-control networks. Its co-founder and chief executive, Uma
Mahesh, a computer science engineer from the Indian Institute of
Technology, is optimistic that he can attract venture capital because
innovation among India's new companies is "a very believable story for
investors."

Perhaps not surprisingly, this increased start-up
activity in Bangalore has caught the eye of influential American
lawmakers. Many American political and business leaders have said they
are worried about a technological brain drain from the United States to
places overseas.

Representative Jerry Lewis, a California
Republican who is the chairman of the House Appropriations Committee,
said that he was trying to find a government agency to sponsor projects
in areas like nanotechnology, semiconductors, energy and
pharmaceuticals, and possibly to collaborate with agencies in India.

"We
are figuring out what kind of support and funding is needed from the
Congress," Mr. Lewis said in a phone interview, adding, "The issue is
not so much about losing innovation leadership as it is about how to
make innovations happen on a cheaper scale and how to make more of it
happen."

That Bangalore can be an incubator city for start-ups
is demonstrated in Read-Ink, which the Binfords have financed entirely
from their savings and retirement fund. They live and work in the same
building, saving on rent. The ground floor contains a kitchen and
employee dining room as well as the Binfords' bedroom and employees'
guest rooms.

Mrs. Binford also runs an all-night accounting
back-office service for American customers. "It is a small service with
seven accountants," she said, "but helps cover the costs."

Improving
the accuracy of handwriting recognition beyond what currently marketed
software products offer is a complicated technical problem. "Current
products have an accuracy rate of 80-85 percent; ours will be a 5-7
percent improvement," said Mr. Binford, Read-Ink's chief technology
officer.

But in getting there, the Binfords have struggled to
recruit and retain the best engineers in a competitive market. They
said they had deliberately stayed in stealth mode for fear of talent
poachers.

There are other growing pains. Finding venture
investors at the early stages of a start-up business can be difficult
because the majority of investors prefer to make safer later-stage
investments. There is also a lack of homegrown innovators serving as
role models.

"The entrepreneurial heroes of the Valley are
accessible to many people," said Sabeer Bhatia, who moved from
Bangalore to the Silicon Valley and co-founded Hotmail, later acquired
by the Microsoft Corporation.

Sridhar
Mitta, president of the Bangalore chapter of the Indus Entrepreneurs,
said, "We are not going to be another Valley anytime soon," but he
added, "The city can match up with Boston or Austin as a competitive
place to start up innovative product companies."